ANZ says Australia's housing slowdown is almost over with prices set to rise again

Discussion in 'Property Market Economics' started by Propertunity, 1st May, 2018.

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  1. Eric Wu

    Eric Wu Mortgage Broker Business Member

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    if there is a will, there is a way ( to some extent), ;)
     
  2. dabbler

    dabbler Well-Known Member

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    The royal commission will stop all that, banks want too lend and people want too borrow, but in this age of wiping everyones behind, they wont want to be seen as carrying on as usual.....for now.

    The lending changes have dramatically changed the landscape for EVERYONE......so only a small % will find it has little to no effect on probably un ambitious goals.
     
  3. MTR

    MTR Material Girl Premium Member

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    ..... and on the flip side it has slowed down.... credit squeeze in the main did work, cos investors are out.

    How many here are actually buying at the moment, have you noticed the drop in threads on this subject, I have.

    ... and then where would you buy in Australia at the moment with current yields... and market softening, makes it a very high risk proposition regardless. Many will be sitting on their hands, not only cos they can not source finance, but because its simply not making any sense.

    Here we go.... now its not all that bad, we will get through this, I did when lo doc/no doc was abolished, this is a walk in the park:), ...... and if all else fails.. just have a glass of wine...

    What If the Worst Happens? - PropertyInvesting.com
     
    Last edited: 2nd May, 2018
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  4. Illusivedreams

    Illusivedreams Well-Known Member

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    I read the article today :)

    It all makes sense
    Hope for the best plan for the worst
     
  5. Rowan

    Rowan Well-Known Member

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    Lending due diligence will need to tighten up however the cap on investment loans have been removed by APRA. True it will be a harder and more grueling process to secure lending but the bottom line is, the banks and APRA want to grow their loan books but with more due diligence. Banks want more business and will hardly turn people away at the door. I am on the fence on how this combination of developments will impact the market but I can't imagine a dramatic difference.
     
  6. euro73

    euro73 Well-Known Member Business Member

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    No. This is not correct, I'm afraid. Don't be fooled into believing the removal of the 10% speed limit means anything. There has been a lot of excitement over its removal , and the media is reporting it as an easing of regulatory intervention, but is complete BS. It equates to a bit fat nothing. Nada. Zero. Zilch.

    It was removed because it was made redundant by the 30% IO quota, which was introduced on July 1,2017. And the 30% IO quota is far more restrictive than the 10% speed limit. Very simple example. If a bank wrote 50% of its volume as IO last year, and was allowed to write 10% more this year, that would mean they could write @ 55% of their volume as IO this year. But obviously that's impossible when they are working under a 30% IO quota. 55% doesnt fit into 30%

    ANZ pretending that the tightening is over is "generously optimistic" at best. We have the P&I re-set coming for $480bn of IO lending across the next 3-4 years... we have far more scrutiny of living expenses coming, and we also have higher cost of funds slowly flitering through. Then there's Basel IV, which no one has even started talking about yet. For all these reasons I'm still calling a 30% chance of an RBA rate cut if delinquencies start increasing. At the very least its increasingly looking like it will be 2020,21 before the RBA could consider increasing rates. The P&I re-set /transition/ migration has to be very carefully managed or it could bring the whole resi mortgage market down.

    Separately - one day, readers are going to look back and wonder why they continued to hold on to the delusion that pre APRA property cycles were going to return. They are going to wonder why they continued believing they could use a pre APRA recipe to bake a completely new cake.They are going to wonder why they didnt inject additional cash flow into their portfolios.

    In the short to medium term..the next 2,3,4 years , prices may certainly rise in cheaper markets ... there is definitely serviceability room for that to happen in Adelaide, Perth and regionals.... but you can basically forget about Sydney and Melbourne and their surrounding larger regionals ( wollongong, geelong, newcastle) for the next 10 years or more unless we see servicing calc policies reversed - and they make up half the Aussie market. So ANZ is unlikely to be on the money ( excuse the pun)

    if you have enough capacity to get a high yielding cash cow of some sort in one of those markets, well worth exploring. Whether thats dual occ, NRAS, build a granny flat, subdivide...whatever..... extra cash flow is going to be really handy . Otherwise, just press pause for a while and focus on reducing debt as much as possible so that when, eventually the average punters borrowing capacity starts returning to pre APRA levels ( which will take a @ 10 -12 years ) and the next upswing begins, you actually have some borrowing capacity available to you so that you can participate.

    #decadetodeleverage
     
    Last edited: 4th May, 2018
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  7. Rowan

    Rowan Well-Known Member

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    IMO potentially the 30% IO cap will be repealed just like the 10% cap as they are intended as interim measures while APRA probes the banks lending practices and devise a longer term solution (like holding more capital for IO loans which is more flexible than a hard cap) I don't disagree with your point overall.
     
  8. euro73

    euro73 Well-Known Member Business Member

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    Its less than a year old and its working as planned. I would argue that the 10% speed limit was the interim measure. The 30% quota was the permanent/ semi permanent measure, introduced after observing the impact of the 10% speed limit for the 2 years between July 2015 and July 2017. The impact was negligible, with total IO volumes only falling from 53% to 46% in that 2 year period. The 30% quota is less than a year old and its working as planned. It will result in lenders having their entire book at 30% IO within a decade. P{robably most of it within 5 years, to be fair. And thats the end goal.Thats when you'll see pricing parity and maybe even 10 Years IO return for stronger borrowers. But I dont think servicing calcs will change so most investors with decent sized portfolios still have to assume they will be servicing a P&I loan after 5 years.

    They need to make sure Australian lenders RMBS have a 65/35 or 70/30 type of balance between P&I and IO. Thats the systemic risk APRA cares about. Not house prices. That is the balance of P&I/IO that made Australian RMBS GFC proof 8,9,10 years ago during the credit crisis, when securitisation markets closed down to almost all lenders worldwide except Australian and Canadian lenders . Yes, eventually the 30% quota may go, but its not going to happen in a hurry and I would imagine its better than a fair chance it would be replaced by a 35% or 40% quota. They will likely never allow the IO volumes to get to 50%+ again. So there will have to be a quota to police that.I doubt that quota will be over 40%.

    The problem here is that far too many people still believe these regulatory measures are about containing house prices and stopping investors from borrowing. They are not. They are about rebalancing the P&I v IO weighting on lenders books, because those books are so reliant on global wholesale funding via RMBS. Investors who embrace debt reduction, move loans to P&I and get on with recalibrating their investment business model will be able to borrow again. Those who continue to pursue low yielding, speculative models will not. Its that simple.

    Until people get their head around the fact this is a deliberate, strategic, 5-10 year strategy to rebalance and remove systemic risk across banks, they are going to continue to believe these regulatory changes are going to pass quickly and growth cycles will return to pre APRA levels. Im sorry, people are going to be sadly sadly disappointed.

    Consider these very simple maths.

    if you have $1 Million of debt today ( which is easy to do with just 1 x PPOR and 1 or 2 INV properties) and its being assessed at 7.2% P&I over 25 years rather than 4.2% actuals, that means a servicing calc now says it costs you $86,352 per annum to service that debt, instead of $42,000. Thats a $46,352 difference, meaning $46,352 of net income that used to be considered available to you on a servicing calc, is no longer considered available to you. That's the same as a $56,150 gross taxable pay cut.

    Screen Shot 2018-05-04 at 3.14.13 pm.png

    Then add HEM's, which have increased by anywhere bewteen 1K and 2K per month for most categories of borrowers, and are likely to get even tougher . There goes another 12-24K.

    Add them together and you have servicing calcs that now use @ 68-80K less income for the first million you owe, compared to how they used to work.

    Take the hypothetical out to $ 2million of debt - which is what most commentators here say is the minimum asset value you need to hold for 15-20 years to have any chance of retirement and the differences equate to 68-80K for the first Million and then @ 56K less income for each million thereafter. ie 124K - 136K for $2 Million of debt.

    Now, how many years do you think the average 150-160K household with a modest portfolio carrying just $1Million debt will take to replace 68-80K of income through rent and wage increases? And remember, thats just to restore their pre APRA capacity, not to increase it.


    Then ask yourself how many years do you think the average 150-160K household with just $2 Million debt will take to replace 124-136K of income through rent and wage increases? And thats just to restore their pre APRA capacity, not to increase it.


    Forget trying to get to a $3 or $4 Million portfolio on anything less than several hundred K of income each. No chance.

    So the maths tell a very very important story. You better start seeing things really differently, and understanding that debt reduction is critical to future borrowing capacity, and growth cycles as we know them are over. This is now a game of dividend reinvestment using cash flow and debt reduction. Its no longer a speculative buy, hold, growth game.

    Also consider this... even if 100% of borrowers reverted to P&I today and simply made minimum monthly repayments, it would take at least 10 years for @ 12% of the debt to be paid off. Minimum monthly isnt going to get it done. You need to make extra repayments..and lots of them. Combined with modest rental and wage inflation, thats the only way you are going to start to see some borrowing capacity restored ....

    The days of endless IO being available to every man and his dog, and the days of endless borrowing capacity being available to every man and his dog are over. All roads , all the maths, all the servicing calculators, all the mortgage repayment calculators- they all say the same thing - cash flow and debt reduction is now king.
     
    Last edited: 4th May, 2018
  9. Someguy

    Someguy Well-Known Member

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    APRA is biting hard, tried to change a loan from P&I back to IO (loan was a few years on IO before changing to PI) so had to go through application procees again to change, my serviceability was nowhere near close to being able to get the loan. This despite the fact that we are way ahead and able to save significant amounts to our offset every week.
     
  10. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    +100 great post
     
  11. Blueskies

    Blueskies Well-Known Member

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    Love the pic in the article...

    worst-case.jpg

    Isn't that @See Change
     
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  12. sumterrence

    sumterrence Well-Known Member

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    Totally agree with Euro's point. And glad that I've been paying p&i for all my inv & oo loan ever since 2013. It's amazing to look back and realise how effortless it was for me to pay off such amount of debt without even noticing.

    Couple with a number of rent increases over the years across my portfolio. My rental income is actually ahead of my p&i repayment now. Let the snowball effect continue!!!
     
  13. ORAC

    ORAC Well-Known Member

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    Once again @euro73, very well written and thought out post that makes a lot of sense. Whilst the changes to re-balance P&I/IO are a risk management exercise for the banking sector, would it be reasonable to assume that there would likely be a knock-on impact to the property market? For example;
    - getting an investment property loan for a large amount becomes more difficult because of more stringent serviceability requirements, consideration of conversion to P&I payments etc.
    - property values flatten out or decline particularly with respect to investor type property and higher priced properties.
    - potential for investors to off-load properties if they can't meet the P&I requirements or realise profits.
    - potential for rents to increase perhaps due to lack of supply from investors or to cover P&I payments.

    Hence, what would be the likely impacts to the property market in the medium term?, perhaps longer term? Will properties be doubling again in another 10 to 15 years? Is it a case of "this time is different" or "just another blip on the radar screen?". Of course, it's impossible to predict the future but wondering what are people's thoughts?
     
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  14. Barny

    Barny Well-Known Member

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    Everything you are thinking is what most are thinking. All these points you make will impact the property market but we don't know how much or for how long, and it won't be every area either.
     
  15. Graeme

    Graeme Well-Known Member

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    Ultimately property is priced according to what people can borrow, which is largely determined by income and interest rates.

    As @euro73 has repeatedly pointed out, the APRA changes have reduced borrowing capacity pretty dramatically, and the Royal Commission may cause the regulators to tighten things further.

    We're also starting to see central banks raise interest rates. The Federal Reserve has made a few hikes recently; the ECB is starting to unwind its stimulus programme, and could start tightening in the near future; and the Bank of England might bump its up next week. The RBA could follow later this year or next year, which will increase borrowing costs.

    Meanwhile wage growth is sitting around the 2% mark. It was 3% to 4% during the mining boom. This will put a limit on how fast borrowing or rents can rise. If you look at long terms studies, the property prices grow on average at just over the rate of inflation, and some markets (particularly Sydney and Melbourne) have increased far in excess of this for about twenty years.

    Property in Sydney and Melbourne is incredibly expensive by pretty much any metric you can name. (OK, versus Hong Kong it might look cheap.) Had prices in Sydney tracked wages since the mid-nineties the median house price would be around $400K.

    At 2% growth, it'll take incomes a very, very long time to catch up. (55 to 60 years to get back to a mid-nineties level of affordability if property prices remain flat.)

    I think that the most optimistic outcome for Sydney and Melbourne will be flat prices and small falls over a prolonged period. But there's also a risk of sharp falls. I know that people will tell me "markets within markets", but when the median house in Mount Druitt costs nearly $700K, I think that you'll struggle to find bargains anywhere.

    I'm not sure about the other markets as I don't follow them. But I think that big capital gains aren't likely.

    @ORAC as a nerd of a certain age, I do like your avatar. :)
     
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  16. euro73

    euro73 Well-Known Member Business Member

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    Good job! You'll be well ahead of the curve when the next credit upswing begins in however many years time... Just keep on doing what you're doing. Even if another credit upswing never happens. Even if there's no material growth beyond CPI for the next 20 years... you'll pay off your debt, have unencumbered assets and most importantly you will have retained the income streams, which will have grown over that time to produce a nice, handy annuity type income stream for life .

    Dividend reinvestment using leverage and CF+ property and P&I repayments - the new world of property investing .
     
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  17. ORAC

    ORAC Well-Known Member

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    Hi @Graeme, I'm glad somebody recognized the significance of the avatar. I thought being 'Ker Avon' would be too ambitious (probably TV's greatest anti-hero if there ever was). I believe all the B7 episodes are now available on youtube, whilst dated the scripting is as strong as ever, and pretty much all of today's TV series "operatic sagas" especially in the sci-fi world owe a great deal to the legacy of B7 (Blake's 7).
     
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  18. C-mac

    C-mac Well-Known Member

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    LOVE Blake's 7. And I'm only in my 30s so I wasnt even alive when the show first aired in the 70s! My aunt would bring it round on VHS (lol) every few weeks. Forged my modern love of sci-fi as a genre (B7 got to me even before star trek and star wars did!).

    I digress... this is a GREAT thread and Euro's sentiments seem to me pretty spot-on to the new reality of residential property investing in 2018 onward.

    In these low-interest rate times I'm also following the same plan. Extra repayments on debt/principal in these low-rate times means that the cumulative effect quickens since more of your $$$ is going to the principal amount. I say this in particular to investors with existing portfolios. If rates do stay low even for another 12 months (and: this is not financial advice as I dont know everyones situations etc. but rather generic 'ideas'); paying down as much debt as possible is the best thing you can do. Even if rents only increase by inflation (or so), the cumulative effect will take over.
     
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  19. Satanoperca

    Satanoperca Active Member

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    Nice to see someone providing a realistic view of the current situation, with the exception of just one small point.

    You have based your assumptions on capacity to borrow, which is correct, however you have not factored in if their is a 5-15% drop in values, reducing any investors existing equity and requiring the revaluation of current and future longs. So if there is a correction, investors ability to borrow will be further restricted when they are told by the banks that their net equity is not 2017 anymore.
     
  20. euro73

    euro73 Well-Known Member Business Member

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    If there is a correction, revaluations aren't required by banks. A revaluation occurs only when new finance is applied for - either a refinance, IO extension or equity release.

    Otherwise, as long as you service your debt, revaluations are not required. This isnt margin lending. There are no "longs"

    Certainly though, if prices do correct, you may have access to less equity/cash out even if you have improved your borrowing capacity...if thats what you were getting at ?
     
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